Lennox International Inc (LII) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International Q4 2008 Earnings Conference Call.

At the request of your host, all lines are in a listen-only mode.

There will be a question and answer session at the end of the presentation.

As a reminder, this call is being recorded.

I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations.

Please go ahead, sir.

Good morning.

Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full year 2008.

I'm here today with Todd Bluedorn, our CEO, and Sue Carter, our CFO.

Todd will review highlights for the quarter and year and Sue will take you through the company's financial performance.

In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures.

You can find a direct link to the webcast of today's conference call on our corporate website at www.lennoxinternational.com.

We will archive the webcast on that site and make it available for reply.

We'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.

Lennox disclaims any intention or obligation to update or revise and forward-looking statements whether as a result of new information, future events or otherwise.

Now let me turn the call over to CEO Todd Bluedorn.

Thanks, Steve.

Good morning and thank you all for joining us.

Two thousand eight was a year of strong operational execution by Lennox in a market environment of unprecedented challenges.

On the market side, it was the third straight year of double-digit declines in residential as new construction dropped to historic lows and replacement markets softened.

We also saw the commercial and refrigeration markets soften significantly during the second half of the year.

Against this backdrop, Lennox executed on significant manufacturing rationalization and cost reduction initiatives throughout 2008.

Looking first at our manufacturing, we opened and ramped up our new low-cost factory in Mexico.

We concluded the consolidation in our hearth business with the closure of our Lynwood, California, facility and a transfer of manufacturing to our Union City, Tennessee, facility.

We executed on the consolidation of our Danville, Illinois, refrigeration manufacturing into our Tifton, Georgia, operations.

We are consolidating manufacturing and other operations for both HVAC and refrigeration in Europe, and we continue with the move of our Australian refrigeration production to China.

In December, we also announced plans to exit seven unprofitable service centers in our service experts business.

Looking at expense reductions, we reduced salaried headcount by 7%.

SG&A was down 7% at constant currency.

And corporate expenses were lower by 37%.

Reflected in our 2008 financial results is the market weakness with offsets from our manufacturing consolidations and cost reduction initiatives.

Lennox was also able to improve product mix and pricing overall for 2008.

For the full year, total company revenue was $3.5 billion, down 7%.

At constant currency, revenue was down 8%.

Adjusted EBIT was $265 million, was down 5%.

Adjust EBIT margin was up ten basis points to 7.6%.

Adjusted EPS from continuing operations was $2.71 for the full year, up 8% from a year ago.

Cash generation for the year was strong.

Cash from operations was $183 million.

Capital spending was $62 million.

Free cash flow was $121 million for the year, which, at 99% of net income, was in line with our business model goal for free cash flow to be the same level as net income.

The company returned $344 million to shareholders in 2008 through share repurchases of $331 million [sic] and dividend payments of approximately $33 million.

Lennox has $285 million remaining on an existing $300 million share repurchase program.

The program has no set end date and is available to be used on an opportunistic basis.

Our balance sheet remains strong with debt-to-EBITDA ratio of 1.3, well within our target range of one to two.

We are well positioned with our balance sheet to sustain and enhance our premium position.

Now turning to the fourth quarter results, revenues for Lennox were $746 million, down 15% or down 10% at constant currency.

Adjusted EBIT margin was up 20 basis points to 6.7%.

Adjusted earnings per share from continuing operations was $0.52, down from $0.55 in the year-ago quarter.

On a GAAP basis, earnings per share from continuing operations were $0.21, down from $0.59 in the year-ago quarter on an impairment of an equity investment and a warranty program gain in the fourth quarter last year.

Despite the difficult environment in 2008 and our strong focus on cost reduction and rationalizing operations, Lennox continued to make transformational investments and innovate.

In residential, Lennox continued to enhance its premium position in the market.

Our mix of Lennox's high-efficiency products of 14 SEER and above grew more than ten points from the fourth quarter a year ago.

Also, in 2008, we announced an innovative product called SunSource, the industry's first integrated solar-assisted residential heating and cooling system.

SunSource begins production this month and is on track for shipments to distributors in the first quarter of 2009.

In our refrigeration business, we introduced a new line of refrigeration condensing units, incorporating all aluminum micro-channel heat exchanger technology.

This technology enables us to reduce the refrigerant quantity by 70% compared to conventional heat exchanges in the industry.

The heat exchanger also uses 40% less material and weighs 40% less.

With this and other key Lennox technologies, we were able to reduce overall system energy consumption by 30% to 35%.

In North America Commercial, we have put in place 11 regional distribution centers over the last few years.

This is paying off for Lennox as, even in a very difficult commercial market, our replacement sales grew in 2008 over the prior year.

Our Strategos product line continues to win in the marketplace as the most energy-efficient rooftop in the energy with energy efficiency ratings up to 60% higher than VOE minimum efficiency standards.

Strategos has been the driving force in Lennox winning 26 new national accounts last year and 54 national accounts over the last two years.

Major customers like Wal-Mart appreciate the high energy efficiency and the low total cost of ownership.

In fact, we were selected to participate with Wal-Mart on a congressional briefing panel on green jobs a few days ago.

Lennox presented real-world information on how green products like Strategos can provide both sustainability and business solutions by saving energy and lowering operating costs.

Speaking of the government, 11 months from now there are two key environmental mandates that take effect.

First, there's a national energy efficiency standard for commercial units that, on average, is 10% higher than what exists today.

With more than 60% of our commercial business already high-efficiency products, Lennox is well positioned for this transition.

Second is a mandatory conversion from R-22 to R-410A refrigerant.

We sell more R-410A rooftops than anyone in the marketplace and are well prepared for this transition also.

Like in the 13 SEER conversion in residential a couple years ago, there will be winners and losers.

Lennox was a winner then, and I like our position now.

One last point, there's lots of talk in Washington regarding government incentives for the conversion of certain buildings like schools and hospitals to high energy-efficient HVAC systems.

Lennox Commercial is well positioned with its high energy-efficient product line and a sales force focused on capturing such incremental opportunities in the market.

Looking ahead to 2009 on the operations front, we are moving forward with our multi-year transformation of our North America residential distribution network that we expect will reduce logistics costs by 200 basis points when fully in place.

We will also improve our sales capability in our placement market with same-day/next-day service level up from 35% to 85%.

On the manufacturing front, we just announced yesterday that we will begin the transfer of production from our Blackville, South Carolina, facility to our Orangeburg, South Carolina, and Mexico facilities.

The transition will take place in phases starting this year and is expected to be completed within two years.

We expect annual savings of $5 million beginning in 2011.

As you would expect, we continue to review and accelerate plans to rationalize operations across the company, and we will update you as we go along.

Looking at our financial guidance for 2009 that we provided at our analyst day in mid-December, our revenue range remains down 8% to 12%, which includes five points of negative foreign exchange impact.

We reaffirm our adjusted EPS from continuing operations of $2.10 to $2.50.

GAAP EPS from continuing operations is now expected to be $1.91 to $2.31, which includes an expected $12 million in additional restructuring charges for the Blackville facility closure.

We expect end markets to remain challenging in 2009.

We expect the North America residential and commercial markets we serve to be down in the high single digits to low double digits.

We expect both HVAC and refrigeration in Europe to be down in low double digits.

We face an especially difficult first half comparison this year due to the softness in end markets.

Also, as I talked about in December, for all of 2009, we expect $20 million in savings from lower commodity prices and $20 million in savings from our global sourcing initiatives.

That being said, the commodity savings will be weighted more to the second half of the year as new agreements fully flow through and higher priced hedges roll off.

Likewise, the timing of the savings from our global sourcing initiatives will be weighted more to the second half of the year as we continue the implementation of cost reduction plans.

Lennox will continue to focus on operational excellence during these challenging market conditions.

We'll continue to reduce costs, enhance our competitive position and execute on our strategic initiatives.

Looking out, when market conditions do start to recover, the company will be lean and well positioned with significant upside leverage in the model.

Now I'll turn it over to Sue.

Thank you, Todd.

Good morning, everyone.

I'll provide some additional commentary on the business segments for the quarter and full year starting with residential heating and cooling.

In the fourth quarter, revenue from our residential heating and cooling business was $299 million, down 15%.

While volume was down 22%, price was up 3% and mix improved 5%.

Currency had a 2% negative impact.

The volume decline compared to a year ago was driven by a significant drop in new construction and softer replacement business as consumers remained cautious in the economic environment.

Segment profit was $27 million, down 12%, with a margin of 9.1%, up 30 basis points from the fourth quarter a year ago.

For the full year, sales in the residential segment were $1.5 billion, down 11% with and without currency impact.

Volume was down 16%.

Mix was up 4%.

And price was up 2%.

Segment profit was $146 million, down 16%, with a margin of 9.8%, down 60 basis points.

As Todd mentioned, the business continues to improve factory efficiencies and further reduces cost structure as 2009 looks to be the fourth straight year of a down market in residential.

Turning to our commercial heating and cooling business, in the fourth quarter, revenue for the commercial business was $189 million, down 16%.

Volume was down 17%.

Product mix was up 2%.

And price was up 3%.

Currency had a negative 5% impact.

Segment profit was $20 million, down 17%, with a margin of 10.6%, down 30 basis points from the fourth quarter a year ago.

Our Europe commercial HVAC revenue was down mid-single digits at constant currency, and the business was in a slight loss position for the quarter.

Aggressive restructuring activities continue in Europe.

In North America commercial HVAC, volume was down due to the overall construction slowdown and general market softness.

For the full year, sales in the commercial segment were $835 million, down 5%.

Volume was down 9%.

Mix was down 1%.

And price was up 3%.

Currency had a 2% favorable impact.

Segment profit was $93 million, down 8%, with a margin of 11.2%, down 30 basis points.

Moving to our service experts business, in the fourth quarter, revenue was $145 million, down 13%.

Volume was down 8%.

And price and mix were flat.

Currency had a 5% negative impact.

The volume decline compared to a year ago was driven by a decline in new construction and softer replacement business.

Segment profit was $8 million, up 11%, with a margin of 5.3%.

Margin was up 110 basis points versus the fourth quarter a year ago, primarily on a full-year true up of actuarial estimates for workers compensation expense reflecting year-over-year improvement in safety performance and a 10% reduction in overall headcount.

An improved service mix and lower fuel costs further contributed to margin improvement in the quarter.

The company also announced plans to exit from seven unprofitable service centers in the quarter, now discontinued operations.

For the full year, revenue in service experts was $627 million, down 6%, with and without currency effects.

Volume was down 6%, and price and mix were flat.

Segment profit was $20 million, down 23%, with a margin of 3.2%, down 70 basis points.

In our refrigeration segment, revenue in the fourth quarter was $131 million, down 17%.

Volume was down 7%.

Product mix was flat.

And price was up 3%.

Currency had a negative 13% impact.

Sales were down single digits in North America and Southeast Asia, including China, and down double digits in other international markets.

Segment profit was $11 million, down 24%, with a margin of 8.6%, down 90 basis points from the fourth quarter a year ago.

As Todd mentioned, manufacturing rationalization is currently underway with the moves from Australia to China and consolidation in Europe.

For the full year, sales in the refrigeration segment were $618 million, up 2%.

Volume was down 3%.

Mix was flat.

And price was up 2%.

Currency had a 3% favorable impact.

Segment profit was $60 million, down 2%, with a margin of 9.7%, down 40 basis points.

Looking at restructuring charges and other items from our continuing operations in the fourth quarter, Lennox had net after-tax charges of $17.4 million from restructuring activities, impairment of an equity method investment and unrealized losses on open futures contracts.

These charges impacted our GAAP earnings per share from continuing operations by $0.31.

As we've been rationalizing our manufacturing operations and headcount over the last year and a half, we have also been benchmarking our benefit plans.

Following this review, the company revised its vacation policy so that employees earn vacation over the course of each year instead of a total year grant at year-end for the upcoming year.

This change resulted in a $9.1 million after-tax benefit to adjusted and GAAP earnings from continuing operations.

The adjustment was allocated across the business segments and corporate based on applicable headcount.

For the full year, Lennox had net after-tax charges of $33.2 million from restructuring activities, impairment and unrealized losses on opens futures contracts that impacted our GAAP earnings per share from continuing operations by $0.56.

This is $0.04 higher than our guidance in December due to additional restructuring.

Corporate expenses were $54 million for 2008, down 37%, driven by headcount reductions, reduced spending and tight budgetary controls, reductions in performance-based annual and long-term incentive plans and increased forfeiture rates associated with our long-term programs.

For 2009, our corporate expense guidance is $60 million.

SG&A was down 6% for the year overall.

At constant currency, SG&A was down 7%.

Our cash provided from operations for the full year was $183 million compared to $240 million for 2007, down on lower net income.

Capital spending was $62 million in 2008 compared to $70 million in 2007.

Free cash flow was $121 million for the full year versus $170 million for the prior year.

In the fourth quarter, cash provided by operations was $43 million, down from $128 million in the fourth quarter a year ago.

Capital spending was $24 million, consistent with the year-ago quarter.

Free cash flow in the quarter was $20 million compared to $104 million in the year-ago quarter.

Cash generation was down in the quarter due to lower net income on lower sales volumes, reduced working capital improvements on a year-over-year basis, collateral posted for copper hedges and discretionary pension contributions with an offset from the sale of receivables through our asset securitization program.

The previously discussed margin call on copper hedges was $38 million based on lower copper prices at the end of the year.

This cash effect is a timing difference that reverses in 2009.

Working capital improvements made a year ago in the fourth quarter of 2007, up $105 million, were very strong, making our more normalized improvement of $69 million in the fourth quarter of 2008 a tough year-over-year comparison.

As we discussed in mid December, we planned additional funding for our defined benefit/pension plans of $40 million to $60 million over 2008 and 2009.

We funded $20 million of this in 2008 and plan to fund the remaining $20 million to $40 million in 2009.

Working capital as a percent of trailing 12-month sales for the company was 18.2% compared to 18.3% in the prior period.

The quarter-end working capital ratio was 16.0% compared to 16.5% at the end of last year.

Let's look at liquidity.

Cash and short-term investments were $156 million at the end of December, and the current ratio exceeded 1.6.

Debt-to-EBITDA was 1.3 at the end of the year.

Our total debt on the balance sheet was $420 million at the end of the year.

We have a $650 million revolving credit facility in place through the year 2012.

We have a $125 million asset securitization facility in place and utilized $30 million in the fourth quarter at excellent rates as commercial paper moved lower.

We also have $32 million of subsidiary credit facilities in place.

In summary, Lennox has strong balance sheet and is well positioned from a liquidity perspective.

Before I turn it over to Q&A, I'll briefly talk about our outlook for 2009.

As Todd mentioned, we obviously remain cautious on the end markets.

We expect the North America residential and commercial markets we serve to be down in the high single digits to low double digits.

We expect both HVAC and refrigeration in Europe to be down in the low double digits.

Based on these assumptions, our revenue guidance for 2009 is to be down 8% to 12%, and this assumes five points of negative foreign exchange impact.

Our 2009 guidance for adjusted earnings per share from continuing operations remains at $2.10 to $2.50.

Our share count assumption is 55 million to 56 million shares, and our tax rate is expected to be 36% to 37%.

Our new GAAP earnings per share range of $1.91 to $2.31 reflects the full year impact of additional restructuring charges announced for the first quarter.

For capital spending, we expect about $80 million in 2009 focused on new product introductions and continuing transformational investments in the business.

And with that, let's go to Q&A.

(Operator Instructions) And first, we'll go the line of Jeff Hammond with KeyBanc Capital Markets.

Please go ahead.

Hi.

Good morning.

Hi, Jeff.

How are you?

Doing great.

I just wanted to dig in on the guidance - great news on change from the December meeting, obviously a lot of challenges out in the marketplace.

Can you give us a sense of any bias within the range based on what you're seeing near term, either all in or within any of the specific businesses where you might see some upside or downside within some of the specifics.

I'll give a little bit of color.

The markets are tough right now.

Our daily sales in December and January, cost and currency, were down mid teens.

And as you suggested, there's lots of moving pieces right now in the economy in the end markets.

Looking at full year, as I said during the script, we expect the North America residential and commercial markets to be down high single digits to low double digits.

We expect both HVAC and refrigeration in Europe to be down in the low double digits.

Now at the same time, we continue to realize, on a year-over-year basis, price and mix, and we continue to win in the marketplace in our commercial business and our refrigeration business with share gains with new products.

On the cost side, you can see with the Blackville closure as another example that we're continuing to aggressively take out factory costs, overhead and SG&A in response to the softening markets.

Okay.

And then, I know 1Q -- and I think you pointed to a tougher first half.

But I know 1Q is particularly light from a seasonality standpoint.

Do you expect to be profitable in the first quarter?

We don't give quarterly guidance, but I think you got the gist of what I said during the script, which both of a combination of the markets being extremely difficult, the year-over-year comp on the markets will get easier as the year goes along.

Given that, the $20 million of material cost reduction and the $20 million of commodities, as I suggested, are back and loaded.

And given the thinness on a normal year of what our profitability is in the first quarter, the first quarter is going to be challenging.

Okay.

Did you quantify what your commercial replacement business was up in the year?

I think you had stated that it was up for '08?

We didn't put a percentage on it.

We just said on an absolute basis it was up year-over-year.

And as you know, in a unitary commercial market that was down 10%, 11%, our replacement sales were actually up.

Okay.

And then down -- I guess within the context of your commercial guidance, I mean, how are you thinking about commercial replacement specifically?

There's a lot of uncertainty on the commercial market, Jeff, as you well know.

We think about all our national account business where we have greater visibility, there are winners and losers.

And luckily, for us, one of our largest individual customers is a winner.

And so we're optimistic about business for them for 2009.

On the broader non-national account, non-retail segment, it's a challenging marketplace right now.

I think our advantage is that we have traditionally had a lower replacement share than others, that we have been focused on it both with product that we have launched, with distribution that we've built and focus of our sales force.

So I think there's an opportunity for us in '09 to continue to gain share in replacement as we did in '08.

So even though the market continues to be challenging, we continue to be focused on the replacement business.

Maybe just to ask it another way, have you seen any kind of paradigm shift on the commercial replacement side near term where people are deferring, or is that kind of a normal course of business?

A paradigm shift's maybe too dramatic.

What we have seen maybe is what you would expect, which is those retailers who are under the most financial pressure are making short-term tradeoffs.

And so we've had some of our national account customers either extend or defer scheduled replacements.

And so you're clearly seeing some of that in the marketplace, which is what you'd expect to see.

At the same time, you see other players who are winning in the marketplace and understand the benefits of the P&L savings to them of upgrading to energy efficiency units.

And hopefully with incentives from the government, we see some of our customers accelerating some of their replacement programs.

So it's a mixed bag, but there's clearly pressure, downward pressure, on some of our national account customers who aren't doing well in the marketplace.

Okay, thanks.

I'll get back in queue.

Thanks, Jeff.

(Operator Instructions)

And we'll go to the line of Glenn Wortman with Sidoti.

Please go ahead.

Yes, good morning, everyone.

Hi, Glenn.

How are you?

Doing pretty good.

Can you just talk a little bit more about the potential benefit from the pending infrastructure or stimulus package?

Yes.

There's lots of moving pieces in the economy.

There might even be more moving pieces in any legislation coming out of DC.

We think, with our product line and our focus on the high end and energy efficiency, we're well positioned for legislation that incentivises, if that's a word, end-use markets like schools, like hospitals.

That's our product lines.

So we think we're well positioned to take some incremental opportunity if things are passed.

And then, just on the residential side, do you see just a move down to some of your less expensive perhaps lower-margin products as a risk given the tight credit markets and perhaps the cash-poor state of many households?

The phenomenon that we have been seeing, and we've been seeing it for a year and a half, two years, in our residential business, other -- as you all know, unlike other industries, we've been in -- this is going to be our fourth year of a market being down double digits in residential.

So we've been here for a while.

I mean, what we're seeing is several effects.

We have seen a move towards repair rather than replacement as people make cash flow decisions rather than economic decisions, as they hoard money.

And I think that continues.

We also have seen a bifurcation of our business, which is we have certainly seen a move from the middle down as customers are cost conscious.

At the same time, we have seen a move up in our product line, and you hear us talk about statistics of percentage of sales that are above 13 SEER as we see customers who understand the energy efficiency story and want to upgrade to those product lines.

So we've seen both effects going on in the marketplace right now.

Okay.

Thank you for your time.

Thanks.

We do have a follow-up from Jeff Hammond.

Please go ahead.

Hi.

Just a couple things that I caught on the call but I wanted some clarification, Sue, could you run through the vacation accrual dynamic again and how that impacted earnings?

Sure, sure.

What we did is we went through and rationalized our benefit policies.

The previous policy on vacation was that, as of 12/31, our employees earned their vacation for the upcoming year.

So what we've done is we've made a change to that, which allows the employees to earn their vacation throughout the year in which we're in.

So the impact of that was an $9.1 million after-tax benefit to the company, which was then allocated to all of the businesses based on the headcount of those businesses.

So it's in their segment results.

And that hit all in the fourth quarter?

It did hit all in the fourth quarter.

Okay.

And it would be ratably by --?

By headcount.

And on a percentage of sales roughly?

I would say, if you looked at the business, the two biggest businesses in terms of headcount for employees are going to be the residential and commercial business, and then smaller amounts going to service experts and refrigeration.

This is US-based employees where it's applicable.

And then, about 10% of it's in corporate.

Okay.

And then, as we look to '09, you capture those -- is it just -- do you get cost savings from this change and it's rolled out ratably, or what's the impact as we look at '09 from this change?

I think the impact is that, as you look at '09, your employees earn the vacation, so it's sort of a pay as you go.

They earn it as they go through each month.

And so really, from a cost perspective, the only time you're truly going to have, in your savings, on a go-forward basis, is if someone leaves the company and you're not having that vacation expense.

So it was more of a one-time impact because of the 12/31 date and accruing for the full year.

Okay, thanks.

And we have a question from the line of Judy Merrick with SunTrust.

Please go ahead.

Hi, thanks.

This is Judy for Keith Hughes at SunTrust.

Hi, Judy.

How are you?

Good, thanks.

You're doing a great job of controlling costs with the corporate expense being down over the years.

It seems like the result came in from 2008 below your guidance around $60 million, and that's your guidance for 2009.

Is that kind of a run rate we should look at, or is there a chance for more benefit like we saw this year to be a little below that or flat year-over-year like this year, like the 2008 results?

The way that I would think about it is that we put the $60 million of guidance out there for 2009 because that's our best estimate of what that cost is going to be.

When you look at 2008 and the results, there was obviously the budgetary controls that I talked about, the decreased spending, but there was also the piece that was compensation related with the annual and the long-term incentives.

As you go into an upcoming year, you are going to reload some of those incentives, particularly the ones on an annual basis, and that gives you really the increase from the $54 million to the $60 million.

And so as we think about it, the $60 million is still 30% below what 2007 was.

But having said all of that, we're obviously always looking at our costs and for opportunities to reduce those costs.

Okay, great.

Thank you.

And we have a question from the line of Michael Coleman with Sterne Agee.

Please go ahead.

Good morning.

Hey, Michael.

The Blackville facility closure, does that change, alter or accelerate your thinking in terms of the savings for the Mexico facility?

I think what it does, Michael, is, the savings that I talked about back in December of -- for our Mexico facility, are as they are, and these are incremental savings in addition to that.

Yes.

I guess what I'm looking at is would the savings from the Mexico facility, though, be even greater because of the Blackville savings, that is, greater volume leverage that you're going to get from Mexico relative to what previously might've been expected with the inclusion of the Blackville volume.

Right.

I understand the question, and again I'll answer it two ways.

One is just mathematically for modeling you combine the two, that's your savings.

Now artificially, we have to divide in terms of how we talk about it.

So yes, part of the $5 million annualized savings that we get from the Blackville closure is driven by the fact that it's going to be produced in Mexico.

Yes, that is true.

But now, that savings was not in what we gave for guidance for the Mexico factory back in December.

Okay.

Let me give you a non-financial answer.

I think our announcement of Blackville and the movement of the production down to Mexico underlies an operational truth, which is we have been extremely successful in our ramp up and production in our Mexico facility.

We started production of product for sale in third quarter.

We are now finishing up our fourth product line move into that facility from our previously announcement movement to Mexico.

Blackville will continue to put more volume in.

As we've talked about the Mexico facility from the beginning, we've always talked about it as we're doing this not for one or two product lines.

This is to build our low-cost assembly facility for the North America market.

And the Blackville announcement I think is just a validation that we are doing extremely well, operationally, in Mexico.

Okay, good.

So following or post-Blackville, how many facilities will you have producing residential equipment?

Our residential factories in North America, at that point in time, for the HVAC market, will be three.

So we'll be going from four facilities to three.

We will continue to have Marshalltown.

We'll obviously have our Mexican facility.

And we have a facility in Orangeburg, South Carolina, that produces product for our allied businesses.

And that's a new facility in --?

No, that's an existing facility.

It was acquired years ago through acquisitions.

And as we announced in our Blackville announcement, some of the product in Blackville is moving to that Orangeburg facility, and the balance of the product is moving to the Mexico facility.

Okay, good.

The SunSource announcement on the product and so forth -- I was wondering if you could just kind of run through just some basics on that in terms of what the actual cost is to the consumer on a product like that, what the availability in terms of tax credits or rebates, in terms of incentives to the consumer, whether or not that counts for utilities in their renewable portfolio standards?

Do you have any kind of overview for that?

Yes, one is in terms of the tax rebates, state-by-state, municipality-by-municipality different and -- point one.

Point two is sort of broadly speaking on the economics about $2,000 more on an average system for having the SunSource solar panels.

And we think, depending on the region, it is economically a viable option.

And so what we've found, as you would expect, in places like California where the rebates are the greatest, we've found -- we have heard lots of interest in this product.

But at the same time, SunSource isn't going to materially change our results.

I think SunSource reflects our focus as an industry innovator, our focus on having products that allows us to get the best dealers in the industry who want to be partnered with Lennox, and I think that's really the focus of SunSource.

Okay, great.

Thank you.

And with that, I'll turn the conference over to Todd Bluedorn.

Please go ahead.

Thanks, John.

Let me sum up.

Lennox had strong operational execution in 2008 and delivered solid results in the face of challenging and uncertain markets.

Two thousand nine end markets will be challenging, but we are focused on continuing to win in the marketplace.

Our cost reduction and operational efficiency programs are on track, and we are accelerating activities where possible.

All of us at Lennox remain focused on execution in 2009.

Thank you all for joining us.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.